Mitsubishi Corporation Not Liable To Deduct TDS On Sum Which Was Not Chargeable To Tax In India: Delhi High Court

The Delhi High Court has held that the assessee, Mitsubishi Corporation, is not liable to deduct TDS under Section 195(1) of the Income Tax Act where the sum paid was not chargeable to tax in India.

The bench of Justice Rajiv Shakdher has observed that the assessee could have taken recourse to the DTAAs qua the reformulated question since the provisions contained therein were more beneficial. Therefore, the business connection test had no relevance once it was established that MC Metal (Thailand) and Metal One (Singapore) did not have a PE in India.

The respondent or assessee made certain remittances for purchases to its seven group companies in Japan, the USA, Singapore, and Thailand without deducting tax at source. The department made a disallowance of Rs. 98 crore under Section 40(a)(i) of the Income Tax Act on the grounds that all the companies have PE in India. The order of the AO was upheld by the DRP, which was reversed by ITAT.

The department preferred appeal before the High Court, where the judges in the Division Bench, comprising Justice S. Muralidhar and Justice Prathiba Singh, differed on Section 40(a)(i) disallowance due to non-deduction of tax at source under Section 195 and the applicability of the non-discrimination clause, which led to the reference to the third judge.

The department contended that the AO rightly invoked the provisions of Section 40(a)(i) and disallowed the deduction claimed by the respondent/assessee vis-à-vis payments made “outside India”, as TAS had not been deducted, although the said payments were chargeable to tax in India. . Thus, the payments made to the 7 entities cannot be claimed by the respondent or assessee as a deduction while computing income under the heading “profits and gains of business or profession." . Failure to comply with the provisions of Section 195(1) correctly resulted in the disallowance made by the AO under Section 40(a)(i). .

The department contended that the appellant/revenue did not advance any argument based on the provisions of Article 9 of the DTAAs entered into by India with Japan and the USA. The order of the division bench stated that the difference of opinion of the judges did not emanate from the provisions of Article 9 of the concerned DTAA. The submission based on Article 9 was noticed and thereafter rejected by the coordinate bench in the herbal life case. The argument advanced on behalf of the respondent or assessee concerning discrimination in treatment will not be impacted because the transactions were entered into between Associated Enterprises (AEs). The only impact of such dealings would be that the purchase price would have to be tested against transfer pricing principles. The tenability of the submission that unequal treatment is accorded concerning payments made outside India or to non-residents as against residents would remain open to examination. The AO, in fact, has adopted this approach by considering TP adjustments and disallowances made under Section 40 separately.

The assessee contended that the provisions of Section 195 follow once income comes within the sway of the provisions of Section 4/5/90 of the Act. The tax burden is on the payee and not the payer; the only obligation cast on the payer is to deduct tax. Mere chargeability to tax under the Act only forecloses some issues. Justice Singh's judgement does not take into consideration the impact of the provisions of Section 90 and the concerned DTAAs.

The court held that the equal treatment or non-discrimination clause obtained in Articles 24(3) and 26(3) of the India-Japan/India-USA DTAAs would apply with regard to the payment for purchases made by the assessee concerning group companies in Japan and the USA.”

Counsel For Petitioner: Ruchir Bhatia

Counsel For Respondent: M.S. Syali

Case Title: The Commissioner Of Income Tax Versus Mitsubishi Corporation India P. Ltd.

Citation: 2024 LiveLaw (Del) 181

Case No.: ITA 180/2014

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